Operating

Operating Budgets:
Budgets: Sales
Sales Budget
Budget
Example – Hayes Company
Expected sales volume: 3,000 units in the first
quarter with 500-unit increments for each
following quarter.
Sales price: $60 per unit.

Illustration 20-3

Chapter
20-1 LO 3: Identify the budgets that comprise the master budget.
 Operating
Operating Budgets:
Budgets: Production
Production Budget
Budget

Shows the units that must be produced to meet

anticipated sales.
Derived from sales budget plus the desired change
in ending finished goods (ending finished goods less
the beginning finished goods units).
Required production in units formula:

Illustration 20-4
Essential to have a realistic estimate of ending
inventory.
Chapter LO 3: Identify the budgets that comprise the master budget.
20-2
 Operating
Operating Budgets:
Budgets: Production
Production Budget
Budget
Example – Hayes Company
Hayes Co. believes it can meet future sales needs with
an ending inventory of 20% of next quarter’s sales.

Illustration 20-5
Chapter
20-3 LO 3: Identify the budgets that comprise the master budget.
 Operating
Operating Budgets:
Budgets: Direct
Direct Materials
Materials Budget
Budget

Shows both the quantity and cost of direct

materials to be purchased.
Derived from the direct materials units required
for production (from the production budget) plus
the desired change in ending direct materials units.

Illustration 20-6
Budgeted cost of direct materials to be
purchased = required units of direct materials ×
anticipated cost per unit.
Chapter LO 3: Identify the budgets that comprise the master budget.
20-4
 Operating
Operating Budgets:
Budgets: Direct
Direct Materials
Materials Budget
Budget

Example – Hayes Company

Key component in budgeting process –
desired ending inventory.

An ending inventory of 10% of next

quarter’s production requirements is
sufficient.

The manufacturing of each unit

requires 2 pounds of raw materials at
an expected price of $4 per pound.

Chapter LO 3: Identify the budgets that comprise the master budget.

20-5
 Operating
Operating Budgets:
Budgets: Direct
Direct Materials
Materials Budget
Budget
Example – Hayes Company

Illustration 20-7

Chapter
20-6 LO 3: Identify the budgets that comprise the master budget.
 Operating
Operating Budgets:
Budgets: Direct
Direct Labor
Labor Budget
Budget

Shows both the quantity of hours and

cost of direct labor necessary to
meet production requirements.
Critical in maintaining a labor force
that can meet expected production.
Total direct labor cost formula:

Illustration 20-8

Chapter
20-7 LO 3: Identify the budgets that comprise the master budget.
 Operating
Operating Budgets:
Budgets: Direct
Direct Labor
Labor Budget
Budget
Example – Hayes Company
Direct labor hours from the production budget.
Two hours of direct labor required for each unit.
Anticipated hourly wage rate $10.

Illustration 20-9
Chapter
20-8 LO 3: Identify the budgets that comprise the master budget.
 Operating
Operating Budgets:
Budgets: Manufacturing
Manufacturing Overhead
Overhead
Shows the expected manufacturing overhead
costs for the budget period.
Distinguishes between fixed and variable
overhead costs.
Example – Hayes Company
Fixed cost amounts are assumed.
Expected variable costs per direct
labor hour:
Indirect materials: $1.00
Indirect labor: $1.40
Utilities: $0.40
Maintenance: $0.20
Chapter LO 3: Identify the budgets that comprise the master budget.
20-9
 Operating
Operating Budgets:
Budgets: Manufacturing
Manufacturing Overhead
Overhead

Illustration 20-10

Chapter LO 3: Identify the budgets that comprise the master budget.

20-10
 Operating
Operating Budgets:
Budgets: Selling
Selling and
and Administrative
Administrative

Projection of anticipated operating expenses.

Distinguishes between fixed and variable costs.

Example – Hayes Company

Fixed cost amounts are assumed.
Expected variable costs per unit sold
(from sales budget):
Sales commissions: $3.00
Freight-out: $1.00

Chapter LO 3: Identify the budgets that comprise the master budget.

20-11
 Operating
Operating Budgets:
Budgets: Selling
Selling and
and Administrative
Administrative

Illustration 20-11
Chapter LO 3: Identify the budgets that comprise the master budget.
20-12
 Review
Review Question
Question

A sales budget is:

a. Derived from the production budget.

budget
b. Management’s best estimate of sales revenue for
the year.
c. Not the starting point for the master budget.
d. Prepared only for credit sales.

Chapter
20-13 LO 3: Identify the budgets that comprise the master budget.
 Operating
Operating Budgets:
Budgets:
Budgeted
Budgeted Income
Income Statement
Statement
Important end-product of the operating budgets.
Indicates expected profitability of operations.
Provides a basis for evaluating company
performance.
Prepared from the operating budgets:
Sales Budget,
Production Budget,
Direct Materials Budget,
Direct Labor Budget,
Manufacturing Overhead Budget, and
Selling and Administrative Expense Budget.

Chapter LO 4: Describe the sources for preparing the budgeted income statement.
20-14
 Operating
Operating Budgets:
Budgets:
Budgeted
Budgeted Income
Income Statement
Statement
Example – Hayes Company
To find cost of goods sold:
First, determine the unit cost of one Kitchen-mate:

Illustration 20-12

Second, determine Cost of Goods Sold by multiplying units

sold times unit cost:

15,000 units × $44 = $660,000

Chapter
20-15 LO 4: Describe the sources for preparing the budgeted income statement.
 Operating
Operating Budgets:
Budgets:
Budgeted
Budgeted Income
Income Statement
Statement

Additional estimated data for budgeted income statement:

Interest Expense: $100 Income Taxes: $12,000

Illustration 20-13
Chapter
20-16 LO 4: Describe the sources for preparing the budgeted income statement.
 Review
Review Question
Question

Each of the following budgets is used in preparing the

budgeted income statement except the:

a. Sales budget.
budget
b. Selling and administrative budget.
c. Capital expenditure budget.
d. Direct labor budget.

Chapter
20-17 LO 4: Describe the sources for preparing the budgeted income statement.
 Financial
Financial Budgets:
Budgets: Cash
Cash Budget
Budget

Shows anticipated cash flows.

Often considered to be the most important output
in preparing financial budgets.
Contains three sections:
 Cash Receipts,
 Cash Disbursements, and
 Financing.

Shows beginning and ending cash balances.

Chapter LO 5: Explain the principal sections of a cash budget.

20-18
 Operating
Operating Budgets:
Budgets:
Budgeted
Budgeted Income
Income Statement
Statement

Basic Format

Illustration 20-14
Chapter
20-19 LO 5: Explain the principal sections of a cash budget.
 Financial
Financial Budgets:
Budgets: Cash
Cash Budget
Budget

Cash Receipts Section:

Includes expected receipts from the principal sources of
revenue – usually cash sales and collections on credit sales.
Shows expected interest and dividends receipts as well as
proceeds from planned sales of investments, plant assets,
and capital stock.
Cash Disbursements Section:
Includes expected cash payments for direct materials and
labor, taxes, dividends, plant assets, etc.
Financing Section:
Shows expected borrowings and repayments of borrowed
funds plus interest.

Chapter LO 5: Explain the principal sections of a cash budget.

20-20
 Financial
Financial Budgets:
Budgets: Cash
Cash Budget
Budget

Must prepare in sequence.

Ending cash balance of one
period is the beginning cash
balance for the next.
Data obtained from other
budgets and from
management.
Often prepared for the year
on a monthly basis.

Chapter LO 5: Explain the principal sections of a cash budget.

20-21
 Financial
Financial Budgets:
Budgets: Cash
Cash Budget
Budget

Example – Hayes Company Assumptions

Minimum Desired Cash Balance = $ 15,000
January 1, 2012, Cash balance: $38,000.
Sales: Collect 60% in quarter sold; 40% in next quarter;
collect December 31, 2011 Accounts Receivable in Quarter 1.
Expected sale of short term investments: $2,000 in Quarter 1.
Direct Materials: Pay 50% in quarter purchased; 50% in next quarter;
pay December 31, 2011 Accounts Payable in Quarter 1.
Direct Labor: pay 100% in quarter incurred.
Manufacturing Overhead and Selling/Administrative Expenses:
Pay (except depreciation) in quarter incurred.
Expected purchase of truck: $10,000 cash in Quarter 2.
Estimated annual income taxes: Equal payment each quarter.
Loans: Pay in earliest quarter with sufficient cash (i.e., cash on hand
exceeds the $15,000 minimum required balance).

Chapter
20-22 LO 5: Explain the principal sections of a cash budget.
 Financial
Financial Budgets:
Budgets: Cash
Cash Budget
Budget

Example – Hayes Company

Usually prepare schedule of collections from customers.

Illustration 20-15

Chapter LO 5: Explain the principal sections of a cash budget.

20-23
 Financial
Financial Budgets:
Budgets: Cash
Cash Budget
Budget
Example – Hayes Company
Prepare schedule of cash payments for direct materials.

Illustration 20-16
Now prepare the Cash Budget based on the assumptions
and preceding schedules.
Chapter LO 5: Explain the principal sections of a cash budget.
20-24
 Financial
Financial Budgets:
Budgets: Cash
Cash Budget
Budget

Illustration 20-17
Chapter
20-25 LO 5: Explain the principal sections of a cash budget.
 Financial
Financial Budgets:
Budgets: Cash
Cash Budget
Budget

Contributes to more effective cash management.

Shows managers the need for additional financing

before actual need arises.

Indicates when excess cash will be available.

Chapter LO 5: Explain the principal sections of a cash budget.

20-26
 Financial
Financial Budgets:
Budgets: Budgeted
Budgeted Balance
Balance Sheet
Sheet

A projection of financial
position at the end of
the budgeted period.

Developed from the

budgeted balance sheet
for the preceding year
and the budgets for the
current year.

Chapter LO 5: Explain the principal sections of a cash budget.

20-27
 Financial
Financial Budgets:
Budgets: Budgeted
Budgeted Balance
Balance Sheet
Sheet

Illustration 20-18

Chapter
20-28 LO 5: Explain the principal sections of a cash budget.
 Review
Review Question
Question
Expected direct materials purchases in Read Company
are $70,000 in the first quarter and $90,000 in the
second quarter. Forty percent of the purchases are
paid in cash as incurred, and the balance is paid in the
following quarter. The budgeted cash payments for
purchases in the second quarter are:

a. $96,000
b. $90,000 1st Quarter 2nd Quarter
28,000 42,000 = 60%
c. $78,000 36,000 = 40%
78,000
d. $72,000

Chapter
20-29 LO 5: Explain the principal sections of a cash budget.
 Budgeting:
Budgeting: Merchandisers
Merchandisers

Sales Budget: Starting point and key factor in

developing the master budget.
Use a purchases budget instead of a production
budget.
Does not use the manufacturing budgets (direct
materials, direct labor, manufacturing overhead).
To determine budgeted merchandise purchases:

Chapter
LO 6: Indicate the applicability of budgeting in nonmanufacturing
20-30 companies.
 Budgeting:
Budgeting: Merchandisers
Merchandisers

Example – Lima Company

Budgeted sales for July, $300,000, and for August, $320,000.
Cost of Goods Sold: 70% of sales.
Desired ending inventory: 30% of next month’s Cost of Goods
Sold.

Illustration 20-20

Chapter LO 6: Indicate the applicability of budgeting in nonmanufacturing

20-31 companies.
 Budgeting:
Budgeting: Service
Service Companies
Companies

Critical factor in budgeting is coordinating

professional staff needs with anticipated services.
Problems if overstaffed:
Disproportionately high labor costs,
Lower profits due to additional salaries, and / or
Increased staff turnover due to lack of
challenging work.
Problems if understaffed:
Lost revenues because existing and future client
needs for services cannot be met, and / or
Loss of professional staff due to excessive work
loads.
Chapter
LO 6: Indicate the applicability of budgeting in manufacturing
20-32 companies.
 Budgeting:
Budgeting: Not-for-Profit
Not-for-Profit Companies
Companies
Just as important as for profit-oriented company.
However, budget process differs significantly from
that of a profit-oriented company.
Budget on the basis of cash flows (expenditures and
receipts), not on a revenue and expense basis.
The starting point is usually expenditures, not
receipts.
Management’s task is to find
receipts needed to support
planned expenditures.
Budget must be strictly followed,
overspending often illegal.

Chapter LO 6: Indicate the applicability of budgeting in nonmanufacturing

20-33 companies.
 Review
Review Question
Question
The budget for a merchandiser differs from a budget
for a manufacturer because:
a. A merchandise purchases budget replaces the
production budget.
b. The manufacturing budgets are the same for
both.
c. A merchandiser has direct labor and direct
materials in its merchandising budget but not
manufacturing overhead.
d. Both a and c above

Chapter
LO 6: Indicate the applicability of budgeting in nonmanufacturing
20-34 companies.
 Chapter
Chapter Review
Review

BE 20-8

North Company has completed all of its operating

budgets. The sales budget for the year shows
50,000 units and total sales of $2,000,000. The
total unit cost of making one unit of sales is $22.
Selling and administrative expenses are expected to
be $300,000. Income taxes are estimated to be
$150,000.
Prepare a budgeted income statement for the year
ending December 31, 2012.
Chapter
20-35
 Chapter
Chapter Review
Review -- Solution
Solution
North Company
Budgeted Income Statement
For Year Ending December 31, 2012

Sales $2,000,000
Cost of Goods Sold (50,000 units @ $22) 1,100,000
Gross Profit 900,000
Selling & Administrative Expenses 300,000
Income from Operations 600,000
Income Tax Expense 150,000
Net Income $450,000

Chapter
20-36